Road to Ruin

For newcomers to the repurchase market, it’s best to first read the About Repo tab on the RepoWatch home page.

April 7, 2011 (last updated: December 1, 2012)

Securitized banking, which is the name that Yale economist Gary Gorton has given to the combination of repurchase agreements and securitization, was the witches’ brew that erupted in 2007 and 2008.

But financial institutions have been repo-ing and securitizing for years. What changed in the 21st Century, to make securitized banking so lethal?

Between 1999 and 2005, regulators took a series of steps to make it easier and more profitable for financial institutions to borrow money with collateral created by securitization. This was the debt that nearly paralyzed the financial markets in 2008.

The steps do not include two congressional acts often accused of causing the crisis – the Gramm-Leach-Bliley Act of 1999, which overturned parts of the Glass-Steagall Act, and the Commodity Futures Modernization Act of 2000, which prohibited regulation of derivatives. See the end of this article for a further discussion of these two acts, which deeply impacted the financial markets but did not contribute directly to the crisis.

The fatal steps were:

1999

(1) Fed switched to tri-party repo: The Fed made a fateful decision that helped set up the financial markets for the 2008 disaster. It began using tri-party repo to implement monetary policy, after almost a century of using bilateral repo. This change concentrated financial-market risk at the Bank of New York and JP Morgan. Federal Reserve officials Ben Bernanke and Tim Geithner have said this was their main concern in 2008, and it’s a problem that still exists today. Further, as long as the Fed is dependent on tri-party repo, it’s hard to see how the Fed can impartially regulate that market or its players.

2000

(2) FASB Statement 140: The Financial Accounting Standards Board issued Statement 140, which modified earlier rules on how companies could securitize loans[1] and laid the groundwork for a robust and highly profitable securitization industry,[2] just as math wizards appeared to be solving the challenges of calculating securitization risks and pricing the bonds.

In securitization, financial institutions pool consumer and business loans, including home loans, and sell asset-backed securities backed by the loans. Banks finance securitization mainly by taking out repo loans and by selling asset-backed commercial paper.

(3) Regulation 1.25: The Commodity Futures Trading Commission said broker-dealers could buy an expanded range of instruments, including asset-backed securities, with the funds they held for their clients and use those new investments as collateral for their own repurchase transactions. This created a surge in demand for asset-backed securities among broker-dealers.

2001

(4) Market crises: The Federal Reserve dramatically dropped short-term interest rates after the dot.com and telecom busts,[3] and it took historic steps to keep the stricken repurchase market alive after the terrorist attacks of 9/11.[4] Financial institutions began to rely more heavily on short-term repo funding to finance their consumer and business lending.

That meant they needed even more securities to use as collateral for the repo loans.

(5) Recourse Rule: Bank regulators made it easier for financial institutions to make more securities, by sharply reducing the amount of equity, or capital, that commercial banks and thrifts had to have in order to hold top-rated, private-label mortgage securities. (Private labels are asset-backed securities that are issued by financial institutions and not guaranteed by federal agencies like Fannie Mae and Freddie Mac.[5])

This encouraged banks to make more asset-backed securities, especially mortgage-backed securities, as long as the securities had a AAA or AA rating. The securities could get those top ratings by being insured by credit default swaps or by being the safest slices of a loan pool,[6]even a CDO pool.

This meant that for the first time rating agencies, instead of regulators, controlled how much equity banks had to have to hold mortgage securities – a development that proved disastrous because credit agencies over-rated the securities, and that meant giant banks would not have enough equity capital to survive the coming runs on securitized banking.

2003

Mortgage rates slipped below 6 percent for the first time in more than 30 years,[7] and short-term rates hit 45-year lows.[8] Demand for home loans was red hot, and investment banks piled into the mortgage securitization business,[9] borrowing on the repo market at 1 percent to securitize home loans paying 5.8 percent.[10]

(6) Rule 15c3-3: The Securities and Exchange Commission said broker-dealers could use an expanded range of instruments, including asset-backed securities, as collateral when they borrowed securities, and the securities lenders could reuse those new investments as collateral for their own repurchase transactions. Here was another reason for broker-dealers to want asset-backed securities.

2004

(7) ABCPaper Rule: Bank regulators said commercial banks needed 90 percent less equity for consumer and business loans if they moved them off their books to a trust that made and sold asset-backed securities and asset-backed commercial paper.[11] This encouraged companies like Citigroup to make more loans, to pass along to their trusts, to create more asset-backed commercial paper and more asset-backed securities to use as collateral to get more repo loans.

(8) Net Capital Rule: The Securities and Exchange Commission let investment banks use their own internal models to calculate risk and equity requirements.[12]So the bankers decided they needed a lot less equity to hold asset-backed securities.[13]This freed them to create more securities.

With securitized banking in full swing, commercial and investment banks, and their giant holding companies, grew rapidly.[14] But in mid-2004 the Fed started raising interest rates[15]and Americans cut back on home loans. Fannie and Freddie ‘s business fell precipitiously.

In normal circumstances, this would have been the end of the boom. But financial institutions kept the market going by stepping up their private-label issuance and reaching out to less credit-worthy borrowers. [16]

(9) Regulation 1.25:In 2004 and 2005 the Commodity Futures Trading Commission said broker-dealers could repo their clients’ collateral with others and in house, without their client’s prior writen consent.

2005

(10) ISDA template:[17]The International Swaps and Derivatives Association published a standardized contract that made it easy for financial institutions to insure asset-backed securities with credit default swaps. (Credit default swaps pay off if the insured security goes into default.) With this insurance, even crummy home loans could be made into asset-backed securities that got a top rating, required little bank equity, and made good repo collateral.

Soon even credit default swaps themselves were being pooled and made into securities – no home loans needed. This kept securitized banking going even after rising interest rates meant there were fewer new home loans to securitize. (Meanwhile, of course, financial institutions and other speculators were also using the credit default swaps to bet against the securities.[18])

This new supply of securities meant financial institutions could take out more repo loans, so they needed more repo lenders.

(11) Bankruptcy Abuse Prevention and Consumer Protection Act: Congress passed the Bankruptcy Act which added repos collateralized with mortgages and interests in mortgages, including mortgage-backed securities and CDOs, to the list of repurchase agreements that were exempt from the claims of other creditors if the repo borrower should happen to go bankrupt.[19] The idea was to head off systemic risk by preventing problems at a bankrupt company from spreading to another firm. Lenders valued that protection and stepped up their repo lending collateralized by mortgages and mortgage-backed securities. [20]

Already more than double its volume in 2000,[21]repo kept climbing. But then in mid-2006 home prices peaked and began a steady, ominous decline, [22] and subprime borrowers began to default.

Financial institutions kept the housing securitization boom alive with record volumes through mid-2007. But in June 2007 repo lenders, worried about their collateral, began a quiet run on the repurchase market,[23] and in July the run began on asset-backed commercial paper. In time, banks could not get financing for their securitization pipeline.

The rest, as they say, is history.

*****

Readers will note that RepoWatch does not include the Gramm-Leach-Bliley Act of 1999[24]as one of the key steps leading to the financial crisis, even though Editor Mary Fricker and her co-author Stephen Pizzo opposed it and testified against it in Congress.

That’s because commercial and investment banks have repo-ed vigorously for decades, and they’ve securitized since 1989, when an appeals court ruled that securitization did not violate the Glass-Steagall Act.[25] In other words, the basic cause of the financial crisis, securitized banking, was legal under Glass-Steagall.

That said, the Gramm-Leach-Bliley Act – and, just as important, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994,[27]which said interstate branching could begin in 1997 – spurred bank consolidation and helped create the too-big-to-fail banks that today both dominate and destabilize financial markets, including the repurchase market. Gramm-Leach-Bliley also let financial institutions get into the same businesses, which meant the same panic hit them all, and it introduced the go-go Wall Street culture into commercial banking, which infected the way the biggest banks did business and cost them their clients’ trust, the only thing that stands between a bank and a run.

In these ways, Gramm-Leach-Bliley was a critical element of the crisis.

As yet unknown, because banks don’t have to disclose, is whether banks used Gramm-Leach-Bliley’s holding company structure to hide a destabilizing surge of in-house repos. (Update June 7, 2012: A June 4 report from MF Global bankruptcy trustee James W. Giddens reveals its use of in-house repos.)

(The 1933 Glass-Steagall Act said a commercial bank can not be affiliated with a company that is “engaged principally” in underwriting and dealing in securities.[26] The 1999 Gramm-Leach-Bliley Act said a parent company could own both a commercial bank and an investment bank.)

RepoWatch also does not include the Commodity Futures Modernization Act of 2000[28] as one of the key steps leading to the financial crisis. That’s because most banks have been able to insure loans and securities with credit default swaps since a Federal Reserve decision in 1996.[29]

That said, derivative volume rose rapidly after 2000, often financed by repo, and regulators have claimed they could have dealt with the crisis at less cost to the taxpayer if they had been regulating credit default swaps and had more information about them. In that way, the Commodity Futures Modernization Act was a critical element of the crisis.

(The 2000 Commodity Futures Act deregulated derivatives traded between private parties. Credit default swaps were the derivative most responsible for systemic risk during the financial crisis.)

-30-

For more information, read the following tab on the RepoWatch home page:

Finding a Fix, which describes proposed fixes for the repurchase market.

I collected the following footnotes for my own use, to help me keep track of some of my online sources. I’m leaving them here in case they’re helpful to you, too. -Mary Fricker

Watching for the next bubble

From the editor

To understand the financial crisis of 2007-2008, and to prevent the next one, you must understand the repurchase market.

Consider This

The financial crisis was not caused by homeowners borrowing too much money. It was caused by giant financial institutions borrowing too much money, much of it from each other on the repurchase (repo) market. This matters, because we can't prevent the next crisis by fixing mortgages. We have to fix repos.

Quotes in the News

"Securities lending was partly responsible for the collapse of the large insurance company AIG when the market seized in September 2008." -- Economists Stephen G. Cecchetti and Kermit L. Schoenholtz, November 7, 2016.
*****
"Data describing bilateral repurchase agreements and securities lending were scant in the run up to the financial crisis, and they still are." -- Richard Berner, director, Office of Financial Research. October 27, 2016.
*****
"The crisis brought to light unique risks from the excessive use of short-term wholesale funding and repo agreements in particular .... Looking back, it is easy to see how certain behaviours and market practices necessitated government intervention with wholesale funding and collateral management reforms becoming a cornerstone of global regulators’ post-crisis efforts to reduce risk in the financial system." -- James Slater, global head of
securities finance at BNY Mellon Markets, Securities Lending Times. September 29, 2016.
*****
"I continue to believe that the post-crisis work to create a solid regime to protect financial stability cannot be deemed complete without a well-considered approach to regulating runnable funding." -- Federal Reserve Governor Daniel Tarullo. July 12, 2016.
*****
"After four years of efforts, regulators and the financial firms with the most at stake have failed to extinguish systemic risk in a crucial short-term lending market (the repurchase market} that greases the wheels of trading in U.S. Treasuries." -- Liz McCormick, Bloomberg. May 25, 2016.
*****
"If a bank goes bankrupt, derivatives and repo counterparties can just demand their money back as though the Bankruptcy Code doesn't exist." -- Matt Levine, BloombergView. May 4, 2016.
*****
"The Great Financial Crisis of 2007-2009 exposed the ineffectiveness of the relevant regulations in place at the time. Yet even now and despite the crisis, the rules remain inadequate and flawed." -- Anat R. Admati, professor Graduate School of Business, Stanford University, May 2016.
*****
"Data gaps persist in securities financing transactions, including repo and securities lending. The markets for these critical short-term funding instruments remain vulnerable to runs and asset fire sales. Yet comprehensive data on so-called bilateral repo and securities lending transactions are scant." -- Richard Berner, Director, Office of Financial Research. April 12, 2016.
*****
"As we look to the future of U.S. wholesale funding, we expect repo to serve as the circulatory system for broader financial markets who have become increasingly reliant on the smooth transfer of collateral." -- BNY Mellon and PwC Financial Services, "The Future of Wholesale Funding Markets," December 10, 2015.
*****
"Market interest rates are effectively determined in the collateral market, such as the repo, or repurchase market, where banks and other financial institutions exchange collateral (such as US Treasuries, mortgage securities, corporate debt, equities) for money." --Manmohan Singh, Financial Times, November 23, 2015.
*****
"In many ways, repos are the building blocks of financial markets. To mess with repo is to mess with the DNA of the markets." -- Andy Hill, International Capital Market Association. September 2015.
*****
"The market for repurchase agreements is an elemental building block of modern financial markets. Whether used as a money market instrument, a source of funding, a means of mobilising collateral, or the transmission mechanism for monetary policy, it is difficult to think of any financial instrument or derivative that is not impacted in one way or another by repo rates." -- Andy Hill, International Capital Market Association. September 2015.
*****
"Nearly half of the liabilities of broker-dealers consist of short-term wholesale funding (repo and securities lending), an amount that is nearly the same as it was during the crisis." -- Federal Reserve Governor Daniel Tarullo, Brookings Institution, November 17, 2015.
*****
"I also believe that the greatest risks to financial stability are the funding runs and asset fire sales associated with reliance on short-term wholesale funding ... If there is one lesson to be drawn from the financial crisis, it is that the rapid withdrawal of funding by short-term credit providers can lead to systemic problems as consequential as those associated with classic runs on traditional banks." -- Federal Reserve Governor Daniel Tarullo, Brookings Institution, November 17, 2015.
*****
"Given its vast scale and position at the center of the wholesale finance markets, repo is without doubt a critical activity. " -- Federal Reserve Governor Jerome Powell, Clearing House Annual Conference, November 17, 2015.
*****
"For the most part, the main problems during that (financial) crisis didn't involve banks that offered both commercial and investment services. Instead, the problems were primarily at traditional investment banks. Had Glass-Steagall remained in place, the financial crisis would almost surely have happened anyway." -- Mark Thoma, MoneyWatch, November 16, 2015.
*****
"Despite of its systemic importance, the repo market remains opaque to most market participants, including even the regulators. Because no official data on repos exists, questions as basic as the overall size of the market are difficult to answer." -- Grace Xing Hu, Jun Pan, Jiang Wang, Tri-Party Repo Pricing, August 2015.
*****
Financial panics are increasing in frequency. While they used to be driven by depositors lining up to get their money, nowadays, "the problem is that institutional creditors do the same thing in the repo market." -- John Maxfield, The Motley Fool, March 19, 2015.
*****
"The repo market, the largest short-term funding market ... still remains susceptible to asset fire sales and runs." -- Office of Financial Research, December 2014.
*****
Repo “is the most important plumbing of the financial system. If the industry cannot come up with a solution, there is some implicit suggestion the Fed would have to step in in a more direct way." -- Darrell Duffie, professor of finance at Stanford University, October 9, 2014.
*****
"Without repo, there is no leveraged positioning in financial markets; without leverage and the constant hypothecation there is nothing to maintain the stock market's exuberance." Repo markets provide "the glue that holds stock markets together." -- Tyler Durden, Zero Hedge, June 27, 2014.
*****
"The Repo market includes both the banking system and the shadow banking system, all in one place. It’s the overnight borrowing and lending market of the entire financial system." -- Scott E.D. Skyrm, May 21, 2014.
*****
"The potential for repo markets to act as a channel for financial instability in the event of (or perception of) financial distress at a large dealer remains .." -- Standard and Poor's, May 13, 2014.
*****
"Regulators and policymakers currently have no reliable, ongoing information on bilateral repo market activity." -- Financial Stability Oversight Council, May 7, 2014.
*****
"These runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover." -- Federal Reserve Chair Janet Yellen, April 15, 2014.
*****
"The banks remain dangerously interconnected and vulnerable to sudden runs because of their dependence on short-term, often overnight borrowing through the multitrillion-dollar repurchase agreement, or repo, market. -- Jennifer Taub, associate professor, Vermont Law School, April 4, 2014.
*****
"The 2007–2008 financial crisis was driven more by disruptions in the Securities Financing Transactions markets than by disruptions in the over-the-counter derivative markets." -- Federal Reserve Governor Daniel K. Tarullo, November 22, 2013.
*****
“The money market fund industry and the repo market is really the major fault line that goes right under Wall Street." -- Dennis Kelleher, CEO of Better Markets, Bankrate.com, July 24, 2013.
*****
Repo: "The silently beating heart of the market." -- Treasury Borrowing Advisory Committee, July 2013.
*****
Under Basel capital rules, "repos among financial institutions are treated as extremely low risk, even though excessive reliance on repo funding almost brought our system down. How dumb is that?" -- Sheila Bair, chair of the Systemic Risk Council and 2006-2011 Chair of the FDIC, June 9, 2013.
*****
"The trigger for the acute phase of the financial crisis was the rapid unwinding of large amounts of short-term wholesale funding that had been made available to highly leveraged and/or maturity-transforming financial firms." --Janet Yellen, Vice Chair Federal Reserve, June 2, 2013.
*****
"The repo market wasn’t just a part of the meltdown. It was the meltdown." --David Weidner, Wall Street Journal, May 29, 2013.
*****
"While regulated banks have faced far tighter oversight following the financial crisis, the shadow-banking market remains a source of potential instability. It is worth remembering that runs here, rather than traditional bank runs, were a cause of the crisis and led to seizures of credit markets." -- David Reilly, Wall Street Journal, February 19, 2013.
*****
"It is worth recalling that the trigger for the acute phase of the financial crisis was the rapid unwinding of large amounts of short-term funding that had been made available to firms not subject to consolidated prudential supervision." -- Daniel K. Tarullo, Federal Reserve Governor, February 14, 2013.
*****
"I don’t think we should be comfortable with a situation in which extensive maturity transformation continues to take place without the appropriate safeguards against runs and fire sales." -- William C. Dudley, President, Federal Reserve Bank of New York, February 1, 2013.
*****
"The global financial crisis that began in the United States in the summer of 2007 was triggered by a bank run, just like those of 1837, 1857, 1873, 1893, 1907, and 1933 ... and it has had devastating effects that continue today." -- Gary B Gorton, Yale University, "Misunderstanding Financial Crises," November 2012.
*****
"Currently, the drivers of systemic risk remain largely intact, and shadow banking appears poised to grow considerably, and dangerously, if it does not acquire the necessary market discipline to shape risk-taking activities." -- From "Understanding the Risks Inherent in Shadow Banking" by David Luttrell, Harvey Rosenblum, and Jackson Thies, Federal Reserve Bank of Dallas, November 2012.
*****
"The essence of shadow banking is to make loans, securitize them, sell the securities and insure them, and actively trade all the financial assets involved. In effect, traditional relationship banking is replaced by a collateralized market system with the repo market at its heart." --William R. White, Organisation for Economic Co-operation and Development, August 2012.
*****
"What was different about this crisis was that the institutional structure was different. It wasn't banks and depositors. It was broker-dealers and repo markets. It was money market funds and commercial paper ...," --Federal Reserve Chairman Ben Bernanke, March 27, 2012.
*****
"The Federal Reserve was forced to take extraordinary policy actions beginning in 2008 to counteract the effect of (tri-party repo) flaws and avert a collapse of confidence in this critical financing market. These structural weaknesses are unacceptable and must be eliminated." --Federal Reserve Bank of New York, February 15, 2012.
*****
"Despite the Dodd-Frank financial reform bill and its directive to address this issue, the problem of bank runs in the shadow system -- a key factor in the financial sector collapse -- has not yet been solved." --Mark Thoma, Professor of Economics, University of Oregon, February 13, 2012.
*****
"Repurchase agreements (repo) are the largest part of the 'shadow' banking system: a network of demand deposits that, despite its size, maturity, and general stability, remains vulnerable to investor panic." --Jeff Penney, senior advisor, McKinsey & Company, June 2011.
*****
"What happened in September 2008 was a kind of bank run. Creditors lost confidence in the ability of investment banks to redeem short-term loans, leading to a precipitous decline in lending in the repurchase agreements (repo) market." --Robert E. Lucas, Jr., Nancy L. Stokey, visiting scholars, Federal Reserve Bank of Minneapolis, May 2011.
*****
"The really interesting thing that happened in September 2008 was the worldwide panic in the banking system – financial institutions running on each other behind the scenes." –-David Warsh, economic journalist, Feb. 6, 2011.
*****
“As a scholar of the Great Depression, I honestly believe that September and October of 2008 was the worst financial crisis in global history, including the Great Depression …Out of maybe the 13 of the most important financial institutions in the United States, 12 were at risk of failure within a period of a week or two.” --Federal Reserve Chairman Ben Bernanke, Financial Crisis Inquiry Report, January 2011.
*****
"Since repo financing was the basis of most of the leveraged positions of the shadow banks, a large part of the run occurred in the repo market." --Viral V. Acharya and T. Sabri Öncü, professors, Stern School of Business, New York University, 2011.
*****
"Housing policies alone, however, would not have led to the near insolvency of many banks and to the credit-market freeze. The key to these effects was the excessive leverage that pervaded, and continues to pervade, the financial industry." --Anat R. Admati, Professor of Finance and Economics, Graduate School of Business, Stanford University. January 30, 2011.
*****
"Without some repo reform, we are at risk for another panic." --Gary B. Gorton, Professor of Management and Finance, Yale School of Management, November 16, 2010.
*****
"While it may be well and good for the Dodd-Frank Act to demand more oversight of mortgages and derivatives, that won’t stop the next run on repo if lenders panic over a different kind of collateral or hear a false rumor and panic for no reason at all." --About Repo, RepoWatch.
*****
The repurchase market is “the deepest, darkest least noticed part of the market’s plumbing.” --Bethany McLean and Joe Nocera, "All the Devils are Here," November 2010.
*****
“So far, all of this has gone largely unnoticed by the public, and that gives shadow banks the opportunity to make their case unopposed." --Mark Thoma, Professor of Economics, University of Oregon, September 28, 2010.
*****
"... the structure of the tri-party market is so closely entwined that it creates a contagion risk as bad as anything seen in the derivatives world." --Gillian Tett, U.S. managing editor, Financial Times, September 23, 2010.
*****
"The collapse in CDO valuations and the resulting inability to use CDOs as collateral for repo was a major, if not the major, cause of dealer illiquidity and insolvency which resulted in massive bailouts and backdoor subsidies." --Yves Smith, Naked Capitalism blog, August 20, 2010.
*****
"Repo has a flaw: It is vulnerable to panic, that is, 'depositors' may 'withdraw' their money at any time, forcing the system into massive deleveraging. We saw this over and over again with demand deposits in all of U.S. history prior to deposit insurance. This problem has not been addressed by the Dodd-Frank legislation. So, it could happen again. The next shock could be a sovereign default, a crash of some important market -- who knows what it might be?" --Gary B. Gorton, Professor of Management and Finance, Yale School of Management, August 14, 2010.
*****
"Leaving the repo market as it currently functions is not an alternative; if this market is not reformed and their participants not made to internatlize the liquidity risk, runs on the repo will occur in the future, potentially leading to systemic crises." --T. Sabri Öncü and Viral V. Acharya, professors, Stern School of Business, New York University, July 16, 2010.
*****
"It is disconcerting that that the Act is completely silent about how to reform one of the systemically most important corners of Wall Street: the repo market, whose size based on daily amount outstanding now surpasses the total GDP of China and Germany combined." --Viral V. Acharya and T. Sabri Öncü, professors, Stern School of Business, New York University, July 16, 2010.
*****
"... it is imperative for policymakers to assess whether shadow banks should have access to official backstops permanently, or be regulated out of existence." --Zoltan Pozsar, Tobias Adrian, Adam Ashcraft, Hayley Boesky, Federal Reserve Bank of New York, July 2010.
*****
“The potential for the tri-party repo market to cease functioning, with impacts to securities firms, money market mutual funds, major banks involved in payment and settlements globally, and even to the liquidity of the U.S. Treasury and Agency securities, has been cited by policy makers as a key concern behind aggressive interventions to contain the financial crisis.” --Task Force on Tri-Party Repo Infrastructure, May 17, 2010.
*****
"Banks should have learned by now it's dangerous to rely on overnight lending." --Allan Meltzer, Professor of Political Economy, Carnegie Mellon University, March 28, 2010.
*****
"This banking system ‐‐ repo based on securitization ‐‐ is a genuine banking system, as large as the traditional, regulated banking system. It is of critical importance to the economy." --Gary B. Gorton, Professor of Management and Finance, Yale School of Management, February 20, 2010.
*****
"I think we were primarily focused on the potential collapse of the short-term funding markets, particularly the overnight repo markets and tri-party repo markets, which would have created a contagion to many other firms."--Federal Reserve Chairman Ben Bernanke, November 17, 2009.
*****
"The best thing to do with the shattered Humpty-Dumpty of mortgage securitization would be to toss the broken pieces into the garbage." --Arnold Kling, Mercatus Center, George Mason University, September 28, 2009.
*****
"Given its size and importance, it is surprising that repo has such a low profile; for example, there is little discussion of it in the financial press." -- Moorad Choudhry, Head of Treasury, Europe Arab Bank plc, London, "The REPO Handbook," September 2009.
*****
“Our regulators allowed the proprietary trading departments at investment banks to become hedge funds in disguise, using the ‘repo’ system - one of the most extreme credit-granting systems ever devised. The amount of leverage was utterly awesome.” --Charles T. Munger, chairman Berkshire Hathaway Inc., Spring 2009.
*****
"Repo borrowing is now by far and away the most important form of short-term finance in modern financial markets.." -- Alistair Milne, Reader in Banking and Finance, City University, London, "The Fall of the House of Credit," March 2009.
*****
“This helps explain how a relatively small quantity of risky assets was able to undermine the confidence of investors and other market participants across a much broader range of assets and markets.” --Timothy Geithner, president, Federal Reserve Bank of New York, June 9, 2008.
*****
"Until recently, short-term repos had always been regarded as virtually risk-free instruments." Federal Reserve Board Chairman Ben Bernanke, May 13, 2008.
*****
"The repo market is as complex as it is crucial. It is built upon transactions that are highly interrelated. A collapse of one institution involved in repo transactions could start a chain reaction, putting at risk hundreds of billions of dollars and threatening the solvency of many additional institutions." --U.S. Senate report, 1983.
*****
"Because of this widespread use in very large amounts, it is important that the repo market be protected from unnecessary disruption." --Paul A. Volcker, Chairman, Federal Reserve Board, September 29, 1982,
*****
"With a repo loan, financial institutions could make or buy more home loans, to pool and produce more securities, to use as collateral for more repo loans. It was a neat, self-sustaining cycle of profitability and a serious growth machine." --About Repo, RepoWatch.
*****
"Surprisingly, financial institutions that said they used securitization to offload risk had actually done just the opposite. Instead, it was the repo lenders who had no skin in the game." --About Repo, RepoWatch.
*****
"Repo, then, was the main way that defaults in the housing market became a full blown credit panic. It was the key transmitter that carried the shock wave from the defaulting homeowner through the canyons of Wall Street to the American taxpayer." --About Repo, RepoWatch.
*****
"In the savings and loan days, we called it Cash for Trash. In those days, thrifts lent borrowers more money than they needed and required the borrower to use it to buy a troubled property on the thrift’s books. Today, banks make repo loans to borrowers who use the money to buy troubled mortgage securities on the banks’ books, and then they use the troubled securities to collateralize the original repo loan from the bank." --Inside Jobs, RepoWatch.
*****

New to Repo?

Start with "About Repo" in the header above.

What’s $1 trillion?

Spending at $1 a second, it would take you 31,710 years to spend $1 trillion. -- Repo is $7 trillion. (See "About RepoWatch.")

Breaking News

November 27, 2016: To get around regulations intended to limit risky lending, some Chinese shadow bankers are "buying stock" which the seller agrees to repurchase with interest on a certain date. This is an effort to make a (repo) loan appear to be an investment, wrote Gabriel Wildau for the Financial Times.
*****
November 18, 2016: The Federal Reserve has become the biggest player in the repurchase market, using the vast trove of securities it acquired during the financial crisis as collateral for loans, for example from money market funds, wrote Bradley Keoun at TheStreet. Critics say this crowds out private companies, distorts pricing, and could make the Fed vulnerable to a financial crisis, as Lehman Brothers was.
*****
November 16, 2016: As part of "The Minnneapolis Plan To End Too Big To Fail" by the Federal Reserve Bank of Minneapolis, shadow banks would have to pay a tax on borrowing of 2.2 percent if they're systemically important and 1.2 percent if they're not. The purpose of the tax is to discourage borrowers from migrating from banks to shadow banks.
*****
November 10, 2016: The introduction in 2012 of the supplementary leverage ratio as a way to strengthen banks in times of stress may instead cause broker-dealers affiliated with bank holding companies to use riskier securities as repo collateral and result in more nonbank dealers doing repurchase transactions, wrote researchers at the Office of Financial Research.
*****
November 9, 2016: Expect Republicans to undo major portions of financial regulation enacted in the last eight years, wrote Josh Galper at Securities Finance Monitor. "Hold on to your seats" and "the right balance needs to be found between global risk management and free-wheeling markets," he wrote.
*****
November 7, 2016: Wells Fargo has nearly tripled its repo lending since 2013 while other large banks with lower levels of capital have been cutting back, wrote reporter Bradley Keoun with TheStreet.

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